Economists Uncut

Is This The Last Rate Cut? (Uncut) 01-31-2025

Is This The Last Rate Cut? Economist Steve Hanke On Fed’s Next Move

Two key central banks today announced rate decisions. The Bank of Canada cut interest rates by 25 basis points. Tiff Macklem, the Bank of Canada governor, said that there’s a lot of uncertainty out there and it just doesn’t seem useful to provide guidance.

 

The potential for a trade conflict triggered by new U.S. tariffs on Canadian exports is a major uncertainty. This could be very disruptive to the Canadian economy and is clouding the economic outlook. On the other hand, the Federal Reserve kept rates unchanged.

 

So we’ll talk about interest rate differentials between the U.S. and other countries, the outlook for the economy and the outlook for monetary policy. Steve Henke joins us today. He is a professor of applied economics at Johns Hopkins University.

 

Good to have you back again, Professor Henke. Welcome back. Thank you, David.

 

Great to be with you as usual. As usual, fan favorite, please email myself or Professor Henke in the emails down below if you have any questions for Professor Henke for his next appearance in a couple of weeks. Let’s start by talking about the Federal Reserve before we move on to Canada.

 

Professor, what was your initial reaction? I’ll play a few clips of the press conference from today. But your initial reaction to today’s announcement from the FOMC, were you surprised that there were no surprises, so to speak? Oh, I thought I agreed with the markets. The market didn’t think they were going to do anything.

 

I didn’t think they were going to do anything. And if you look at the market, the federal funds, Fed Funds Futures Market, on the Chicago Mercantile Exchange, it looks like the markets really, even going to the March and May meeting of the Fed, the consensus is that they’re not going to change. I mean, we’ll go two more meetings and they probably won’t change anything.

 

Yeah, this is the CME FedWatch table that you’re referencing here. March, 82% chance of no cut. May, 54% chance, 39% chance of one 25 basis point cut.

 

It’s always good, David, to see what the markets are thinking. You can listen to all the talking heads you want to, but the big thing is people with skin in the game, what are they doing with their money? And that’s where you find it, the Fed Funds Futures Market. Right.

 

Take a listen to what Powell had to say about economic growth and basically his rationale for why the Fed paused rate cuts today. And we’ll react together. Recent indicators suggest that economic activity has continued to expand at a solid pace.

 

For 2024 as a whole, GDP looks to have risen above 2%, bolstered by resilient consumer spending. Investment in equipment and intangibles appears to have slowed in the fourth quarter, but was strong for the year overall. Following weakness in the middle of last year, activity in the housing sector seems to have stabilized.

 

In the labor market, conditions remain solid. Payroll job gains averaged 170,000 per month over the past three months. Following earlier increases, the unemployment rate has stabilized since the middle of last year, and at 4.1% in December remains low.

 

Nominal wage growth has eased over the past year, and the jobs to workers gap has narrowed. Overall, a wide set of indicators suggest that conditions in the labor market are broadly in balance. How would you evaluate his assessment of the economy? Well, the interesting thing to me listening to the clip that you had is that it reflects the fact that the Fed is completely data dependent.

 

They’re watching all these economic indicators day by day, and that’s what forms their image of the economy and how it’s doing. You notice he never talked about the two things that are key that make the economy go, money and credit. He never mentioned the money supply growth.

 

He never mentioned credit growth, and those are the drivers that fuel for the economy. And the reason for that is that the Fed has no theory about the course of the economy or national income determination. I do.

 

I use the quantity theory of money, and that tells me where the economy is going, where the nominal GDP is going. And nominal GDP, remember, is the real rate of growth in GDP plus the inflation rate. That’s the nominal GDP, and you get that by looking at changes in the money supply.

 

And to hit the Fed’s inflation target, which he never talked about inflation either, you notice he never talked about inflation. To hit the target of 2%, Hankey’s golden growth rate for the money supply measured by M2 is 6% per year. And now the money supply data just came out yesterday, by the way.

 

The year-over-year growth rate’s 3.9%. So it’s come up a little bit, but it’s still anemic, too slow. ED HARRISON Yeah. I’ll play an inflation clip for you right after this, Professor.

 

But given that you think that the money supply, which has contracted before, is going to lead to an economic contraction, do you think that today’s rate pause is a policy mistake? WALTER ISAACSON Again, monetary policy really is not about interest rates. It’s about changes in the money supply. And the big thing that would change the money supply is to stop quantitative tightening.

 

The Fed is too tight. So in that sense, I thought a 25 basis point reduction, it would be OK, not a big deal one way or another. The big deal is quantitative tightening.

 

And by the way, the interest rate does work its way kind of indirectly through the system, because it does affect the bank loans and credit emission by commercial banks, which is growing a little bit faster than it has been. But it’s still not growing all that fast. Remember, most of the money supply is created by commercial banks.

 

And the rate of growth in the credit market, let me just see. Bear with me, David, just a second. It’s only 3.5% year over year.

 

It’s growing below 6%. So the aggregate money supply measured by M2 is growing at 3.9. The commercial bank credit is only growing at 3.5. Both of them are below 6%, which is the Hanke’s golden growth rate. So they’re just too tight.

 

And I have talked, I’ve used the R word before. I think really, I prefer to simply say the economy is going to slow down in 2025, whether technically it dips into a recession or not. There’s no need to get into that fight.

 

The thing we have to notice is that the nominal GDP will go down because inflation will go down. I think it’ll be dipping down by the end of the year below 2% target, and I think the real growth will be slow. Okay, I’m actually curious because we talked about the quantity theory of money a lot.

 

I just want to revisit this formula with you and then we’ll move back to the Fed. So this is, let me just pull up the formula here. This is the formula MV equals PY, and then it’s spelled out in greater detail in this article here.

 

But let’s just take this, where do you start with assumptions here? Do you set the GDP target first is my question? I mean, why do you assume a 3% or 2% GDP target first? Let’s say, so the first thing you have to do, the M times V equals P times Y, that’s an identity mathematically. It must be true because the M times V is the amount that’s being spent, and the P times Y is the amount that’s being received. So the amount that’s being spent in the economy has to equal the amount that’s received.

 

So that’s why it’s an identity. Now, the next thing you have to do is you have to put those into logarithms and differentiate them. And then you can get something that you can handle, and that is M plus V equals P plus Y. And if you plug the numbers in there, the M is the percentage change in M plus the percentage change in V equals the percentage change in P plus the percentage change in Y. Now, what you set is the P is set, that’s 2%, that’s the inflation target.

 

So what you do, you have to rearrange the M plus V equals P plus Y. Okay, so P is the constant. So the other variables are constantly changing then. So P is the constant.

 

Just a second. We want to rearrange the algebra and solve for M. To get the golden growth rate, you want M. And so M equals what? Well, you have to take V over to the right-hand side of the thing, and it’s minus V. So it’s P plus Y minus V. Now, what numbers do you put in there on the right-hand side, the P and the Y and the V? Well, we look at historical data. Number one, P is 2, okay? Y is, historically, the potential growth rate in the US economy is about 2%.

 

It’s a little more than that. Last year, you heard Paul say, I think Paul said it was a little over around 2%. I can’t remember it now from the clip that you read.

 

But that’s another 2%. So you have 2 plus 2, and then minus a minus, because the velocity is a minus number. It’s about minus 2%.

 

Now, a minus and a minus is a plus. So you have 2 plus 2 plus 2. Yes. 6. M is 6. That’s how you get 6. This is the back of the envelope thing.

 

P is given as a target. That’s 2%. The potential growth rate in the US economy is more or less 2%.

 

And then V is actually minus 1.79. Let’s just call it 2%. And that’s a minus. But we have a minus in front of the minus.

 

And if you have a minus minus, it turns into a plus. The 6%, the Hanke’s golden growth rate, back of the envelope, which is close enough for this kind of exercise, it’s about 6%. Yeah.

 

So that’s basically what you’ve done here. And then you have P plus Y minus V. What if you were to, so P is 2%. So you’ve got 2 plus Y is 2, and then minus, what’s the V again? 2. 2. It’s actually empirically, if you measure it, which of course I have, the trend in V is minus 1.79 in the United States.

 

But let’s just say it’s minus 2%. This is what’s going on here. Okay.

 

So then you have a plus. All right. So my question is, what happens if we change Y to, let’s say, 3 or 1? I mean, if we assume that the growth rate of the economy changes, wouldn’t the M change? Then M goes up.

 

The golden growth rate goes up by 1. If you put 3 in there instead of 2, M equals 7 would be instead of 6. Exactly. So my question is, if we’re expecting growth rate to slow, professor, let’s say we change 2 to 1. I’m going somewhere with this. Wouldn’t we need less money supply for inflation, not 6% anymore growth rate in M2? Yeah, right.

 

Would you care to elaborate as to why it would not change the growth rate to like 1.5? Number one, these things don’t change instantly. You have a big lag between the money supply growth rate and changes in asset prices. That takes a lag.

 

And a bigger lag changes in economic activity. And a bigger lag changes in inflation. So if you change the growth rate and the money supply from a golden growth rate of 6 to 5, number one, that’s just the golden growth rate.

 

That’s a guideline. It’s not what you’re actually doing now. We’re growing the money supply at 3.9%. Correct.

 

So basically, it would not work into the system for quite some time. So we solved the golden growth rate. And it should be roughly 6% per year over a long period of time.

 

It was, by the way, in the 1990s. Greenspan more or less was hitting the golden growth rate. And remember what was happening to inflation in the 1990s.

 

It was actually a little bit below 2%. So the thing works historically. And I think it’s confusing to go through these hypotheticals like we’re doing now, like if we were in a classroom or something like that.

 

I understand. Here’s what’s interesting to me, Professor. This is the 3.9% growth rate that you’re talking about, right? So we’ve got M2 right now growing at 3.9%. You’re over here, like you said.

 

The golden growth rate per your calculation should be 6, somewhere here. However, if you take a look at what’s happened in the past decade from 2010 to 2020, the average growth rate of the M2 money supply was somewhere between 5% to 8%, discounting what happened during COVID. This was an anomaly and so was this.

 

But take a look at what happened during that period for CPI. When the growth rate of the money supply back then was much higher than it is now, the inflation rate is lower than it is now. How can we explain that? Because it’s dynamic.

 

The thing’s changing. It’s going down. The right hand, it behaved very well.

 

You said it was between 5% and 8%. That’s not that bad. And it was pretty stable and prices were actually a little bit below the target.

 

Now, if you look at that chart, the right hand part of that thing, inflation came down very fast and now it’s plateaued out. I think if you point that arrow down to 2%, that’s where it’s going. It’s going lower next year.

 

And it’s going lower because the stock of money is actually lower today than it was in July of 2022. That’s point number one. And the current rate of growth is 3.9% with the numbers that we just got yesterday for M2.

 

And that’s quite a bit lower than 6%, the golden growth rate. So that’s why where you have that arrow now, I’m pretty confident that’s where we’re going for the two money supply reasons that I just gave you. The stock of money is actually lower than it was in July of 2022.

 

And the current year-over-year rate, if you measure the rate of growth in the money supply year-over-year, it’s pretty anemic. It’s not growing that fast. Here’s Powell’s remark about inflation.

 

Here’s a 30-second clip of him talking about inflation. Let’s take a look. You might find this interesting.

 

The Lehman Rocket is not a significant inflationary pressure. Inflation has eased significantly over the past two years, but remains somewhat elevated relative to our 2% longer-run goal. Estimates based on the consumer price index and other data indicate that total PCE prices rose 2.6% over the 12 months ending in December, and that excluding the volatile food and energy categories, core PCE prices rose 2.8%. Longer-term inflation expectations appear to remain well-anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.

 

What does well-anchored mean in this context? In that context, he’s saying it’s anchored and not going up. He just means the markets don’t expect it to go up. That’s what he’s saying.

 

Now, I don’t buy that. The markets actually, I think, have it wrong. I think the yield on the long-term bonds anticipate inflation and are priced in inflation too much inflation.

 

Because remember, yields on bonds follow inflation. We have the following sequence, David. Changes in the money supply with a lag eventually affect inflation.

 

Yields on bonds follow inflation. If you think that things are well-anchored and you’re saying you’re getting that information out of the market, I don’t buy that because the yields on long-term bonds have actually gone up. Yeah.

 

Well, here’s a 10-year reaction to today’s announcement. It dropped from 4.585% all the way down to 4.53%. So a little bit of a drop. Is the market then anticipating slightly lower inflation then? And perhaps, well, what do you talk about? The market action today was saying they’re not loosening up.

 

They’re going to remain because the market reads these federal funds rates being tight or loose. So they didn’t lower, meaning they didn’t loosen. And that means for the market, the market was saying, we think inflation is probably going to come.

 

It is well anchored and it’s probably coming down. And as a result, the yield on the 10-year came down a little bit. That would be my kind of talking you through what I think the markets did.

 

Well, the first statement that he made, Powell made, that the labor market is not a significant source of inflation. I’m guessing you agree with that. Yes.

 

The only source of inflation, for God’s sakes, is to change the money supply. Let’s jump now someplace where they believe, by the way, that the labor market, there is a theory. It’s poo-pooed and it’s been trashed.

 

The theory was wage price inflation. Not the quantity theory of money, but wage price. And you have this thing called the Phillips curve, where you look at the unemployment rate related to changes in prices.

 

All of that’s labor market. So the Bank of Japan, stupidly, I think, they raised, by the way, their short-term interest rate last week in a big mistake. And they’re looking at the labor market and they say, oh, inflation is coming from the labor market, wage push.

 

And to fight that, we’re going to increase short-term interest rates in Japan. I think it was a big mistake because that is not the channel for inflation. Inflation comes from the money supply.

 

And the money supply in Japan, it’s hardly growing. It’s growing at like 3% per year, way below, by the way, their inflation golden growth. I mean, their golden growth rate, Hankey’s golden growth rate is about 6% in Japan too.

 

So the money supply is very, very, very tight in Japan already. Very slow growth in the money supply. And then on top of it, they’ve tightened interest rates some more.

 

And they say the reason they’ve done that is because of this wage price move, that inflation is being caused by the labor market in Japan. No, that’s not true. And it isn’t true in the United States either, or any place else for that matter.

 

This is an interesting question on the money supply. And I’ll move on to another topic, Professor. This came in from a viewer a couple of weeks ago.

 

Is the annual growth rate of the real question or the availability of M2 in the system? I can understand how the availability of M2 has dropped since July 2022 to October 2023. But by reaccelerating quite dramatically, actually, it has recouped the drop. And hence, you could argue that the economy is functioning now as if the growth in M2 would have been 6% on a linear basis for the last five years, for the past five years.

 

I think the core of the question is the level of the M2 money supply versus the growth rate as a percentage change basis. Can you comment on this? OK, yeah. So he’s got it kind of mixed up.

 

What’s happened is that he talks about the trend in there. And what happened is that the trend rate of growth, when COVID came and the money supply got pumped up, there was a huge blip way above the trend rate. And what that meant is that there was a big accumulation of excess cash balances in the system.

 

And that kind of kept fueling the real economic activity and so forth. And that’s why we didn’t get the normal slowdown in the economy when the money supply started coming down very fast because this excess cash balance thing, it took it a while to burn off. But it has burned off.

 

And the inventory is all gone. And now we’re actually running on fumes in a way because we’re down below the trend rate. If you look at the money supply M2 and divide nominal GDP into it, that’s how you figure the cash balance thing.

 

And that has actually come down and is below the trend now. So he doesn’t have his arithmetic quite right. I see his point that he’s trying to make, but the arithmetic is not right.

 

We’re actually below now the trend rate of growth in M2 divided by nominal GDP, which is actually the demand for money. It’s technically the inverse of velocity. Velocity is M2 divided in the nominal GDP.

 

So if you invert it, you actually get the demand for money. And that’s what he’s grappling with, with this trend thing that he’s getting up to. You’ve commented on this before, but maybe we can revisit it again.

 

So we’re talking about this is the money velocity of M2, right? And it’s been trending up ever since basically COVID. And the growth rate has been slower than in the first half of 2022. But anyway, it’s still going up.

 

So a lot of your questions have come in about this over the past couple of months. Professor, why is inflation not going to skyrocket because M2 money velocity is skyrocketing? Because all it’s doing is reverting back to the… Remember, I told you if you actually measure technically the velocity, again, the velocity is nominal GDP divided by M2. If you actually measure that over a long period of time, it’s 1.79% minus in the United States.

 

That’s the trend rate of growth in the money and in velocity. And all that we have done, we had this big deviation from the trend. And now it’s reverting back to the trend, which it always does.

 

That’s why the trend is a trend. And the trend is your friend. So everybody gets all excited about this, but it’s actually just moving back to the trend.

 

So it has to be back towards the trend before we can say inflation is coming back. Is that what you’re saying? It has to be close to the historic average or no? Well, I think by focusing on the velocity, you’re just going to get your feet all completely tangled up in it. It’s very hard to explain to people.

 

But the only thing they should remember is that there’s a trend in the United States and all countries. And the trend for developing countries for velocity is about minus 2% per year. The trend in developing countries is about minus 3%.

 

And those are just what the numbers are. And if you look at all these things, and John Greenwood and I have done that in 67 different countries, you get deviations from these trends. But if you have a deviation, the deviant behavior reverts back to the trend.

 

And so that’s what’s happening now. By the way, I’d like to explore inflation in other countries with you in more detail next time. Today, we’re just talking about the Fed and Canada in just a minute.

 

But just out of curiosity before we move on, which country right now has the highest level of inflation? Because I know you track this every month. Well, Zimbabwe. It’s still okay.

 

It was Lebanon at one point? Yeah, Lebanon, but that went away. And Zimbabwe has been up pretty close to the top for a long time. It’s well into the triple digits.

 

And then both Sudan and South Sudan are also triple digit. The triple digit ones, of course, you have the civil war going on in Sudan, and chaos in South Sudan. And then it drops down.

 

You’ve got Venezuela is pretty high. Venezuela is about 80%. But Venezuela is sky high, but stable at about 80% per year.

 

A reporter asked Powell an excellent question about whether or not the Fed would take action against a huge, or action in response to a huge drop in the equity markets. Second question is just, I wonder if the AI prompted sell off in the stock market this week signaled anything to you about the state of financial conditions? On AI, it’s a big event in the stock market and in particular parts of the stock market. I mean, what really matters for us is macro developments.

 

And that means substantial changes in financial conditions that are persistent for a period of time. So I wouldn’t put that label on these events. Although, of course, we’re all watching it with interest.

 

China’s DeepSeek AI company came out with a model that was more efficient and cheaper than OpenAI’s chat GPT. And so tech companies sold off in the US. Do you think the Federal Reserve would respond to financial instability that’s removed from macroeconomic forces, just company specific things that bring down the stock markets? Are they going to respond to that? Well, I don’t know.

 

If it’s just playing around with the stock market, the answer is probably no. But if what’s going on in the stock market and the financial markets in New York, if the plumbing of the system, shall we say, the internal workings of the things start getting plugged up, the Fed will react immediately. Let’s talk about Sudan and Zimbabwe another time.

 

Good case study for why they’re experiencing hyperinflation. But let’s close off in Canada now. OK, just one second.

 

Just to clarify on this point that you raised, which is fairly important, let’s say that the stock market, I think the stock market is in bubble territory. And there’ll probably be some correction of maybe minus 15% to 30%. That would be a correction.

 

And if that was the case, the Fed wouldn’t do anything. But if in that process, something gets jammed up in the internal plumbing of the financial system, the Fed would react to that. But just the headline number of the stock market correcting itself by 15% to 30%, the Fed wouldn’t react to that.

 

They react to the plumbing going bad, the pipes getting plugged up, the repo market going wacko or something like that. I mean, the last time they intervened like this, it was the repo market that got plugged up. And it took them three or four days before they acted.

 

But they did act. And they’ll act again. Okay, so we’ll keep tabs on that.

 

Financial markets is not an official mandate of the Federal Reserve, correct? Well, we’re not discounting the fact that they react to this. But why should they care is the simple question. Well, let’s assume there was some serious problem in the plumbing.

 

That could bring the whole house of cards down. I mean, that’s why they do pay attention to it. All right, let’s turn now to Canada.

 

This is from the Bank of Canada. Inflation remains close to 2% and past cuts in interest rates are boosting economic growth in Canada. At the same time, the threat of wide ranging tariffs by the new US administration has increased uncertainty.

 

Quarterly growth in GDP has estimated to have been about 1.4% in the second half of 2024. The labor market is still soft. And the economy remains in modest excess supply.

 

Spending has begun to increase on housing and on goods and services that are sensitive to interest rates. CPI inflation has remained around 2% in recent months. Why are they cutting rates, Professor, if the Canadian inflation rate is already close to their 2% target, which is a very different scenario than the US, by the way? Well, yeah.

 

Their inflation target is not 2%. It’s 1 to 3. The Canadian target is 1 to 3. It’s not a single number. Okay.

 

So they’re right in the zone because inflation is running at 1.83% in Canada. So inflation is in the target zone. They’re meeting that.

 

And Hankey’s golden growth rate is between 6.2% and 8.2% in Canada. And the growth rate year over year in the money supply is in that zone. It’s 6.44, about 6.5% year over year.

 

So everything is kind of in the zone. And I don’t make too much out of the cut. I’m just curious as to why.

 

Okay. So this came in from the Financial Post, Canadian newspaper. A protracted trade conflict would most likely lead to weaker GDP and higher prices in Canada, policymakers said in a statement accompanying the rate decision.

 

If they’re expecting tariffs to increase prices on certain consumer goods, why would they risk further exacerbating inflation by cutting rates? Well, again, monetary policy isn’t about interest rates. It’s about changes in the money supply. And it’s come up a little bit, by the way.

 

It’s come up a little bit, which leads me to say, well, why are they kind of pushing on the gas a little bit? Maybe your point is correct. Maybe it was a little bit aggressive, shall we say. And maybe they are playing with fire a little bit.

 

Because as I say, they’re in the golden growth rate zone. The lower end of that growth rate is 6.2% for Canada. And they’re at 6.44%. The money supply is down at the low end of the zone.

 

So that looks on the tightish side, not too bad. And inflation is 1.83%, which is kind of in the middle of the 1% to 3% target. But I would say the move was a little bit biased on the aggressive side.

 

But not wild one way or another. I mean, everything is pretty well behaved on the money supply side of things and inflation in Canada right now. So you might put it this way.

 

By making the reduction, why do they want to upset the apple cart, particularly when the loonie, as you know, that’s your currency, the Canadian dollar, is very weak. So why would you? And interest rates, by the way, do affect exchange rates. They may or may not have much effect on the money supply.

 

But they do have a pretty direct effect on exchange rates. Now, as it turned out, you and I just looked before we went on the air at the Canadian dollar and the Canadian dollar didn’t move hardly at all. I mean, it actually ticked up and appreciated just slightly, but it essentially didn’t move.

 

That’s right. This is what happened today. Which by the way, you and I didn’t know what was going to happen before we looked at the chart.

 

And both of us guessed that the reduction in the rate with the Bank of Canada would have weakened the Canadian dollar. It actually appreciated slightly, which means that you and I, our guess was wrong. Well, why? I’m wondering, I’m trying to figure out why our guess was wrong.

 

I mean, logically, the interest rate differential should signal a weaker loonie versus the U.S. dollar. Well, we’ll see what happens tomorrow. I want to finish off with one more question on Canada.

 

This is again from the Bank of Canada. The Bank of Canada has planned for different potential tariff scenarios, including the likely implications of each on Canada’s economy. One model explores a broad-based 25 percent tariff applied by both Canada and the U.S., which the central bank asserts would put Canada into a recession.

 

Perhaps the Bank of Canada cut rates in anticipation of this likely scenario. What’s your assessment? I mean, if somebody forced you to give a prognosis, would you say that Canada is at risk of going into recession? Oh, yeah. The Canadian economy is very weak.

 

I mean, you’ve had Trudeau up there basically swinging a wrecking ball around at the economy for years. Canada’s got tremendous problems with the economy. So maybe that’s why they, I would say the rate cut, given what we talked about before, I would characterize it as a little biased towards aggressive, not a neutral.

 

They have something in mind, basically, because why upset the apple cart if the apple cart’s running pretty smoothly? Money supply is growing right on Anki’s golden growth rate. The inflation is pretty well behaved in Canada. So you have to ask the question.

 

Something was in their mind to make a move. And by the way, given what you and I talked about, I think the risk of reducing that rate would be a weaker Canadian dollar, and the Canadian dollar is already very weak. And a weaker Canadian dollar certainly is going to feed through towards an uptick in inflation.

 

It’s not going to, a lower, a weaker Canadian dollar is not going to help inflation. Let’s put it that way. Yeah, that and fewer Canadians will drive south of the border to do their shopping.

 

But anyway. Oh, yeah. Every time I talk to Canadian, you haven’t complained about this, but every time I talk to a Canadian, they’re peeved that their purchasing power is going down the tank.

 

And by the way, this is one reason they got rid of Trudeau. What we’re talking about, it’s a Trudeau effect. The economy has been very weak.

 

GDP, I looked at GDP per capita, and the US is just outpacing Canada tremendously. If you look at the last 10 years of growth in GDP per capita, the US is going up, up, up, and Canada is just, you know, more or less flatline. It’s not going to take place.

 

There’s going to be an election soon. We don’t know when exactly. It hasn’t been called yet.

 

Some people speculate before April, but the latest is going to be October. So at some point, there’s going to be an election. Currently, the Conservatives in Canada are leading in the polls, but their gap is kind of narrowing now that Mark Carney is the runner up to lead the Liberals.

 

So Mark Carney, as you know, is a former governor of the Bank of Canada, later on, governor of the Bank of England. Do you know what he may do to turn the economy around? I mean, if you were a central banker, you know, what would you do to turn this, or former central banker, what would you do to turn this economy around? Well, the central bank should keep doing what it’s doing. Yeah, they’re right in the golden growth rate.

 

The money supply now, after goosing the thing with a pandemic and giving Canadians inflation and all of that, you should be trying to keep the growth rate, the money supply between 6.2% and 8.2% if you want to hit the inflation target in Canada of 1% to 3%. So steady as you go. Okay, so before we head off, Professor, I want to comment on the consumer credit card situation in the US and then talk about how hedge funds are reacting to yields.

 

But first of all, what’s your reaction to this rising level of debt here from consumers? I mean, one can interpret this as saying consumers are more confident to spend money. The other explanation is that they have no more cash and so are relying on credit cards. Certainly retail sales are going up commensurately.

 

So perhaps this is a good sign. I’ll let you comment on it. Okay, the credit card thing, if you use high-frequency data, which you don’t have, you’re looking at a very long-term thing.

 

If you have high-frequency data and you’re looking at credit cards, actually the credit card loans went up on November 6th, the day after Trump was elected. They went up and they’ve gone up just a little bit. The rate of growth annualized went from about 2% to 6%, not really a big deal.

 

And non-revolving loans, mainly car loans, they went up too. So consumer credit cards and non-revolving loans, it did go up a little bit following the election of Trump, but they came off very low levels. So I’m not too concerned about it.

 

And the delinquency levels are not that unusual. Consumer leverage in the United States is manageable. So it’s kind of a tempest in a teacup, what you’re saying.

 

I’m not too concerned about it one way or another. That’s a consumer credit. It looks like it’s on pretty solid ground, not too many delinquencies.

 

And yes, it did go up a little bit, the rate of growth after Trump was elected, which by the way, just suggests they have a lot of confidence in Trump. It’s a Trump effect. The little increase that we saw, I would say is a Trump effect.

 

Okay. And here we have a story on fund managers and their outlook for U.S. high-yield bonds. We talked about the long end of the curve a little bit earlier in the interview, but this is in regards to high-yield bonds.

 

Fund managers are bullish on the outlook for U.S. high-yield corporate bonds despite a lengthy rally, and some believe they could get a further boost from the new U.S. president, Donald Trump, even as parts of the market look overheated. The so-called spread or premium over Treasuries offered by high-yield or junk-rated bonds has fallen from nearly six percentage points in July 2022 to about 2.6 percentage points this month, according to data from ICE. And the narrowing has been driven by investors clamoring for yield.

 

What’s your response to this? Do you share a similar outlook for corporate spreads? Well, I think they’re being too… Well, the spreads, I think, will keep coming down because all these hedge funds, as well as asset managers, they’re reaching for yield. And I think they’re taking too much risk. If you go after high-yielders, they’re more risky.

 

That’s why they yield a lot. So they’re going after leverage loans. And foreign markets, by the way, David, you didn’t have foreign markets up there.

 

They’re all piling into foreign markets, high-yielding bonds. And one reason for that, for example, if you look at asset managers, they did very well in last year, 2024, and they asked to get the mandates that they have to allow them to take more risk. And the mandates were revised that allowed them, starting in January, to take more risk than they were taking in 2024.

 

So they’ve all been piling in. It’s a great party. They’ve all been making a lot of money.

 

I think they’re asking, perhaps, to have a little bloody nose. The markets are all risk-on. All the markets are risk-on.

 

Everybody wants to take risk, and they’re chasing yield. And that’s always, I think, a little imprudent, particularly when you have a lot of risk going on that I don’t think are priced into the market at all. All the new policies that Trump is going to put in, we don’t know how people are going to react to any of those things.

 

You wouldn’t take this trade then? No. Fair enough. We can… And especially now, they’ve already, as you pointed out, the spreads between the high-yield and risk-neutral, you said they were 6%, and you said they’ve gone down to 2%.

 

You were reading out of the Financial Times. They’ve squeezed most of the juice out of the lemon already. It’s like the stock market, by the way.

 

The equity premium, the yield on stocks versus bonds, it’s disappeared. You’re taking a lot of risk with the stock market, but you’re not getting paid anything for it. By the way, let’s finish off on this note, actually.

 

This came in from the press. Trump’s federal worker buyout isn’t a buyout, it’s a deferred resignation. I’m not sure if you read about this.

 

An email from the Trump administration encouraging federal government workers to resign has caused some confusion among agency employees and the public. The missive offered workers a deferred resignation program under which those who choose to opt in would retain their full pay and benefits through September. They would also be exempt from the government-wide return to office mandate.

 

Many headlines have called this a buyout. Do you think people are going to bite? Is this going to have a significant impact on the labor market? Ultimately, they’re trying to reduce the size of the government. That’s what the DOGE program is.

 

They’re trying to lower the deficit by cutting costs. Is this going to have any impact on government expenditures? Well, again, it’s a little bit hard to predict. The big complaint that the civil servants have is that they’re not required to go into the office, so they stay home and claim they’re working.

 

We know what they’re doing. I mean, a lot of them are sitting on the couch watching television, drinking beer or something else. But it’s hard to say how many are going to take this offer.

 

Yeah. By the way, Trump did sign an executive order making it easier to fire people. Yes.

 

My crystal ball on this is locked away in the closet, David. I mean, what is your reaction to this? Do you agree with this policy? Not so much? Oh, I agree with cutting civil service workers. That’s been a huge thing in the Biden administration.

 

They were adding civil servants like mad. Why? Because civil servants are in unions, and unions tend to vote Democratic. So they were just buying votes.

 

It’s patronage. It’s what they call patronage. Trump signed an executive order recently or in the first week, which outlines that it is now easier to fire civil servants, and they’re going to retain workers based on meritocracy.

 

That was signed. So now they’re asking people to come back to the office. And if, I guess, people don’t want to do that, they can opt in to this deferred resignation program.

 

Right. So I don’t think that’s unreasonable. Do you think it’s unreasonable to ask somebody to show up at the office? I mean, look, no.

 

I personally know. But it’s not my opinion that matters. I’m curious as to what these government workers think of this and whether or not they agree with you or me.

 

I think some might take the bait, because I think a lot of them are very happy for so-called working at home. They have the same thing in other organizations that I’m aware of. And if you call that organization and expect to get somebody, you get an answering machine.

 

And then what happens? A day or two later, they call you back and they say they’re working from home. Well, you know what they were doing at home. No, we don’t know what they were doing at home, but they weren’t working.

 

I understand. OK, let’s see how this develops and let’s see whether or not people will actually be resigning. And let’s see if they actually have this will have any impact on next month’s non-payroll numbers and unemployment numbers.

 

We’ll see. OK, thank you very much, Professor. You can follow Professor Henke in the links down below.

 

We’ll put his email as well as his ex-Twitter handle. Best way to get in touch with him there. Thank you very much, Professor.

 

We’ll talk again soon.

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